What next for Government backing of innovation and startups? Media release from StartAUS #fedbudget

Wednesday, May 14th, 2014

Government must move quickly to fill gap left by abolition of Commercialisation Australia, Innovation Investment Funds, and take swift action on Employee Share Schemes.

Budget 2014 presented the Government with the ability to demonstrate its commitment to supporting Australian tech entrepreneurs, and correcting market failures that have held back the development of our startup ecosystem.

The recent Crossroads report set out a number of key issues facing Australia, and outlined the opportunity for Australia to diversify its economy from one based on resources, primary industries and domestic focused business to one based on high-growth knowledge-intensive businesses.

Government backing for startups: Commercialisation Australia and Innovation Investment Funds

The abolition of Commercialisation Australia removes a vital lifeline for Australian startups and much needed support for angel investment.

Commercialiation Australia has been a vital lifeline to Australian startups. It has so far supported over 500 companies with grants in excess of $200 million. Much of this funding has gone to companies such as ingogo, Liquid State and 121cast who take this initial funding, build a viable business, and go on to raise additional private funds.

StartupAUS hopes that closure of the Innovation Investment Funds, which has involved the investment of more than $300 million in Australian venture capital (VC) funds, does not signal the end of government support for Australia’s VC industry. StartupAUS would like to see future funding that develops and supports a world-class cohort of VC fund managers, allocates capital to the most deserving funds, adopts a transparent decision-making process and effectively deploys funds to stimulate a vibrant VC industry in Australia.

There’s not enough information on the new Entrepreneurs’ Infrastructure Programme to form a view about its usefulness, or relevance to tech startups, at this stage. The initial wording suggests a concerning focus on SMEs rather than high-growth tech businesses.

Steven Baxter, board member, StartupAUS managing director River City Labs commented: “The reality is there’s nothing in this budget that indicates the government wants to support tech startups in Australia. The concerning top-level conclusion is that a “saving” of $845.6 million over five years is another way of saying the government will reduce its support for innovation by nearly $170 million a year.

“Whilst we can understand the Government’s rationale in regulating support for corporates, they are in danger of throwing the baby out with the bathwater. Commercialisation Australia and the IIFs were not handouts, they were valuable early stage funding mechanisms that enabled great ideas to be commercialised and startups to get their product to market. Their loss pulls the rug out from under a large number of startups, and will have an immediate impact on our startup ecosystem.

“Australia invests a fraction of what other developed countries do funding tech startups, and the budget has provided no solid proof that the government intends to rectify this. We need tech startups as a major focus of the Entrepreneurs’ Infrastructure Programme as they are an important driver of economic growth and their needs are very different to those of regular small businesses.”

Employee Share Schemes:

The current tax treatment of ESOPs is having a detrimental impact on Australia’s ability to attract and retain the best workers.

This was recognised in Budget 2014, which stated: “Removing unnecessary obstacles to business formation and investment by start-up companies is a critical part of establishing an effective innovation system. High costs of entry and exit have the potential to discourage the type of start-up companies that often pioneer new technologies and work practices, and may also shield incumbent firms that may be less efficient from new competitors.”

According to a survey by Deloitte and Norton Rose, only 57% of Australian startups have an ESOP scheme, despite ESOPs being recognised as the single most important way of incentivising early employees in a startup. Of those companies, only 37% had actually issued share options in the last three years.

StartupAUS is calling for three key steps for ESOPs:

Impose the tax upon and at the time of sale of the employee shares – ie. during or after a liquidity event.

Define Startup clearly and broadly with appropriate metrics to achieve certainty of the ESS, and with sufficient flexibility to be beneficial to the appropriately eligible startups.

Deploy clear, simply drafted and standardised Employee Share Option Programs and Employee Share Schemes, and a reporting system for startups.

Peter Bradd, board member, StartupAUS and entrepreneur-in-residence, Fusion Labs commented: “Australia has a fast developing startup ecosystem with some fantastic people and companies, and increasing interest and levels of support. But founders here are not on an equal footing with many other developed economies, and face a both market failures in the regulatory environment and a shortage of angel and venture capital.

“Budget 2014 has left us with more questions than answers. Focusing on savings is just one side of the coin, we also have to look at how Australia can increase its revenue. PWC has said that the startups can contribute as much as $109Bn and 540,000 to our economy by 2033 and it would be a shame if we miss this opportunity. We need more companies that have global aspirations, and if our leaders don’t bring Australia in line with the rest of the world when it comes to fostering tech startups, we will continue to see many of our most successful startups have no choice but to move overseas.”